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Islamic Fund Industry Overview November 2004 | Eurekahedge

The modern Islamic fund management industry was born in the
1970s, when a new class of Arab investors, rich from oil profits
and celebrating the 15th century of the Islamic calendar (Hijra)
in 1976, sought a culturally-aware alternative to the "profit
at all costs" mentality of western investing, particularly
in interest-dealings. The industry has been growing ever since:
Islamic banking is active in 75 countries and is growing at
15% globally, with an estimated $1 trillion waiting to be
managed.

The primary characteristic that distinguishes Islamic fund
management from conventional investing is its compliance with
Shariah law. Fund managers who are Shariah compliant must
adhere to moral economic activity and invest only in companies
that have an ethical purpose. In addition, the investors cannot
deal with conventional banks that trade in fixed rate interest,
or Riba, but instead would depend on Ijara, an Islamic method
of financing. Investments must also be screened for companies
that trade items restricted in Islamic laws, such as alcohol,
tobacco, pork, gambling or pornography. While limiting investment
strategy might seem a hindrance, there are advantages to this
"ethical" investing. For instance, Islamic funds
were little affected by the scandals afflicting companies
such as Enron and WorldCom several years ago, as these companies'
highly leveraged balance sheets restricted Shariah funds from
buying them. In fact, some conventional managers have adopted
Shariah law for strategic purposes.

Today, there are over 250 Islamic financial institutions
with assets around $230 billion. However, the vast wealth
of Islamic funds under management is not well-diversified;
Saudi Arabia controls 70% of all assets under management.
The primary fund management companies that cater to these
investors are Citibank (Saudi American Bank), HSBC (Saudi
British Bank/Al Amanah), Al Rahji and Al Ahli. Outside the
Muslim world, London is the world's hub of Islamic banking
activity; however, its banks offer few retail products to
the Muslim community.

In Southeast Asia, Malaysia is the aggressive force, holding
9% of Muslim finances. Reciprocally, Islamic banking comprises
10% of Malaysian finances. With a dominant force like Saudi
Arabia in the mix, Malaysia's goal of being the number one
player in the Islamic fund industry remains a daunting challenge.
However, with industry liberalisation following the 9-11 attacks,
its efforts to woo rich Saudis have given it a decisive regional
advantage.

One of the key factors towards propelling Islamic investment
management into the mainstream is to acquire non-Muslim funds
and clients, a trend which has already materialised in Malaysia:
70% of Malaysia's Islamic banking customers are Chinese. However,
this trend may owe more to the distribution of wealth in Malaysia
than to demographic preferences. Singapore also intends to
throw its hat into the ring, according to the MAS' new chairman,
Goh Chok Tong (Singapore's ex Prime Minister), who plans to
attract more Islamic businesses to the country. In addition,
OCBC, DBS and UOB - Singapore's three principal banks - which
manage Islamic funds are exploring opportunities in Malaysia
and, to a lesser extent, the Middle East.

The world of Islamic finance extends far beyond basic fund
management, particularly in Sukuk (Islamic bonds) and hedge
funds. In fact, the first Shariah-compliant hedge fund - the
Shariah Equity Opportunity Fund - was launched on October
10 in the Gulf, although the Shariah restrictions reduce its
risk and speculative structure. Given the recent surges in
oil prices, private wealth in the Middle East is expanding
at unprecedented rates, and currently stands at about $1.5
trillion, much of which is more inclined to invest domestically,
as long as there is supporting infrastructure. To the victor
who can capitalise on these investment opportunities, the
spoils will undoubtedly be tremendous.

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